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Economic woes affect retirements--Online Discovery
MADISON, Wis. (10/6/11)--While still less than 50/50, the chances of a return to recession have grown substantially in 2011, affecting how people plan for their retirement, a CUNA Mutual Group retirement expert told Online Discovery Conference attendees Tuesday.
Scott Knapp (left), director, investment strategy for CUNA Mutual Group, told Online Discovery Conference attendees the economy is still struggling because of the type of recession we are recovering from: a debt deflation spiral similar to the Great Depression. (Photo provided by CUNA Mutual Group).
The economy is still struggling because of the type of recession the nation is recovering from: a debt deflation spiral similar to the Great Depression, Scott Knapp, director, investment strategy for CUNA Mutual Group, told conference attendees. “This happens when public and private debt reaches a bubble level,” Knapp said. “Then credit gets choked off in the financial system and that leads to a credit crisis and a rapidly slowing economy … this is by far the worst category of recession and it is the hardest to exit.” The only remedy for a debt deflation spiral is time, so the country’s patience will be tested for an extended period as excess debt gets paid down. The Federal Reserve believes recovery will be slow as indicated by its warning that interest rates will be kept low until 2013. “Translation: Don’t expect any meaningful growth for the next two years,” Knapp said. As price inflation outstrips wages, consumers are falling backward. Corporate profits, however, are excellent. Balance sheets and profitability in the corporate sector are strong, which is good for everyone because it supports the overall economy, Knapp added. In addition to the current state of the economy, demographics, a possible extended period of below-average investment returns, and structural changes in the economy are leading many to re-evaluate retirement planning. Nearly four in 10 workers said they will retire after age 70 or just keep working, and in 2008, at the height of the tension, only 20% of current retirees felt very confident about their retirement security, according to a 2008 Employee Benefit Research Institute survey. “The U.S. doesn’t lack a willingness to provide for baby boomers in retirement, but it doesn’t have capacity to live up to all the promises that have already been made,” Knapp said. “As a result, benefits are currently funded through issuance of debt, and that’s not sustainable. Having modest expectations about the government’s role in providing retirement security is prudent. Those preparing for retirement must take full control of their future circumstances.” Total lifecycle planning and outcome-based strategies are taking the lead in preparing for retirement. “Having enough assets accumulated at retirement is not enough,” Knapp said. “Pension-like benefits must be also available during the post-retirement income phase, even from 401(k) plans. The industry needs to innovate in the post-crisis era, and achievement of retirement security must become less dependent on investment returns.”
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